The Bank of Israel will ask the ministerial committee on legislation to reduce the number of monetary council members to five and explicitly prohibit the appointment of Knesset members and civil servants.
The Bank of Israel is intensifying its opposition to the compromise proposal for amending the Bank of Israel Law approved by the cabinet yesterday.
The Bank of Israel will demand substantive changes in the decision, which is to be sent to the ministerial committee on legislation, led by Minister of Justice Meir Sheetrit, before the bill is put to the vote at the Knesset.
Senior Bank of Israel officials complain of the “inappropriate procedure” through which the compromise proposal was presented to the cabinet. The Bank of Israel officials argue that top Ministry of Finance officials disregarded Governor of the Bank of Israel David Klein’s request to present the ministers with a two-page position paper containing reservations over the move and “positive suggestions” for amending the Ministry of Finance’s proposal. Despite Klein’s request, the amended Ministry of Finance proposal was not accompanied with an appended comment pointing out that Klein opposed the amended version submitted by Minister of Finance Silvan Shalom.
Following are the major changes to the cabinet decision the Bank of Israel will demand at the debate to be held by the ministerial committee on legislation:
- To eliminate any possible appointment of Knesset members, civil servants or government officials to the monetary council. Bank of Israel sources say that if there is no intention to appoint public servants and government officials to the council, the law should be explicit on this point.
- To set up a five-member council. A seven-member council is cumbersome when the number of members familiar with monetary issues is small.
- To make provisions concerning the government’s duty to consult the Governor of the Bank of Israel on appointing deputy governors and external council members.
To intensify the commitment to price stability. As formulated in the amended version, the price stability target does not assure that the long-term objective will be price stability. The reservations were retained in the amended proposal, although in a watered-down form. In practice, the government will be able to change the Bank of Israel’s targets whenever it wishes, without the bank having the suitable monetary tools for attaining them.
- To enhance the bank’s independence. Defining the targets and the bank’s roles weakens the bank’s independence and the credibility required for maintaining price stability.
To create “Chinese walls” that will prevent conflict of interest. The monetary council members will not receive wages from the Bank of Israel, but remuneration set by the Minister of Finance, which in practice subordinates them to the politicians. In addition, any businessman (e.g. a company owner or board of director member in public or government companies) has a clear conflict of interest. On the one hand, he is committed to his job, but on the other hand, he must observe the utmost secrecy about sensitive information on interest-rate decisions and their impact on the markets and the exchange rate. Bank of Israel sources wonder how the cabinet passed this clause without a word from the legal experts.
- To reduce government involvement – especially the Minister of Finance’s involvement – in running monetary policy, the exchange rate and foreign currency reserves.
- To clarify the issue of responsibility and authority. The compromise proposal grants the Minister of Finance wide-ranging powers in setting targets and in the practical management of policy, but legal responsibility (omissions and commissions) lies solely with the governor and the officials of the Bank of Israel. The amended version implies that any state or parliamentary commission of inquiry will always find the governor and the officials of the Bank of Israel responsible for failures.
Published by Israel's Business Arena on 18 March, 2002